Monday, April 30, 2007

When Large Cap Stocks Outperform Small Caps

Over the last ten trading sessions, we've seen solid gains in the Dow Jones Industrial Average (DIA; up over 4%), but more muted gains in the small-cap Russell 2000 Index (IWM; up about 1.3%).

I went back to 2004 (N = 825 trading days) and found 81 occasions in which the Dow was up more than 2.5% in a 10-day period. When the Dow was up strongly and outperformed the Russell (N = 29), the next five days in the Russell (IWM) were up by an average of .66% (21 up, 8 down). On the other hand, when the Dow has been strong but the Russell has been stronger (N = 52), the next five days in the Russell (IWM) averaged a gain of only .05% (27 up, 25 down).

It thus appears that, when the Russell has underperformed a strong large cap Dow over a 10-day period, it has tended to play catchup over the following week. As I'm writing this (9:13 AM Monday morning), the Russell is continuing to underperform the large caps. I'll need to see some signs of selling drying up (rising NYSE TICK lows and negative TICK unable to push IWM to new lows) to act on this pattern.

It's when real-time action confirms historical patterns that particularly good things can happen.

About Me

Author of The Psychology of Trading (Wiley, 2003), Enhancing Trader Performance (Wiley, 2006), The Daily Trading Coach (Wiley, 2009), Trading Psychology 2.0 (Wiley, 2015), and Radical Renewal (2019) with an interest in using historical patterns in markets to find a trading edge. As a performance coach for portfolio managers and traders at financial organizations, I am also interested in performance enhancement among traders, drawing upon research from expert performers in various fields. I took a leave from blogging starting May, 2010 due to my role at a global macro hedge fund. Blogging resumed in February, 2014, along with regular posting to Twitter and StockTwits (@steenbab). I teach brief therapy as Teaching Professor at SUNY Upstate in Syracuse, with a particular emphasis of solution-focused "therapies for the mentally well". Co-editor of The Art and Science of Brief Psychotherapies (American Psychiatric Press, 2018). I don't offer coaching for individual traders, but welcome questions and comments at steenbab at aol dot com.